Maryland Gov. Harry Hughes was warned by a trusted adviser in October 1984, seven months before the collapse of Old Court Savings & Loan, that "self-dealing" by several "high-flying" thrifts threatened the fabric of that industry and could spell disaster for the state government.
In a prophetic four-page memorandum dated Oct. 5, 1984, George W. Liebmann, who was then serving as a consultant to the governor on other, unrelated issues, warned that the "extreme permissiveness" of Maryland laws regulating savings associations had allowed several thrifts to engage in "an extraordinary amount of self-dealing," or ventures that could benefit thrift officers. The severity of that situation, Liebmann said, was compounded by the "technical insolvency" of many of those same institutions.
Liebmann's memo, a copy of which was obtained today by The Washington Post, contradicts earlier assertions by Hughes and his aides that it was not until early May of this year -- just prior to the depositor runs at Old Court that triggered an industrywide crisis -- that senior administration officials first learned about the shakiness of Maryland's savings and loans.
In an interview today in his State House office, Hughes described Liebmann as "a very bright guy." He said he read the memo and then referred it to his chief of staff, who then asked the top regulator of Maryland thrifts to comment on it.
The regulator, Charles H. Brown Jr., who was then director of the state Division of Savings and Loan Associations, wrote to one of Hughes' cabinet secretaries on Nov. 21 saying, "I will agree George Liebmann raises some interesting and important issues."
Brown wrote that he, like Liebmann, had "some reservations about insider loans . . . . As a matter of fact, I have often felt this should be prohibited altogether."
However, the thrust of Brown's response was to defend his agency's monitoring of the savings and loan industry and to praise the board of directors of the Maryland Savings-Share Insurance Corp., the now defunct private insurer of 102 savings and loan associations.
"That isn't what I would call sounding the alarm," Hughes said of Brown's reply. The governor went on to describe Liebmann's memo as "great to look at in hindsight . . . . If I knew what the problems were going to be, obviously I would have paid a little more attention to it."
"But everybody was assuring us we didn't have a problem," Hughes added.
The "self-dealing" described by Liebmann and the "insider loans" mentioned by Brown are at the root of Maryland's five-month-old thrift crisis, which has plunged three large institutions into conservatorship and left hundreds of thousands of depositors without total access to their money.
The owners and chief officers of Old Court and Merritt Commercial savings and loans, both of Baltimore, are now under separate criminal investigations, in part because of allegations that they funneled millions of dollars of depositors' money into commercial real estate ventures from which they extracted exorbitant fees and profits.
In his memo, Liebmann suggested that the self-dealing by thrift officers had gone unchecked because of weak state regulation and because MSSIC, which was intended to oversee and insure the industry, was "little more than an industry promotion fund."
"The state has effectively given the industry a blank check," Liebmann asserted.
Liebmann suggested that legislation then being drafted by a special legislative committee for the 1985 session of the General Assembly "will be inadequate and will in some ways not touch on" the critical issue of insider dealing.
However, both Hughes and Ejner J. Johnson, Hughes' staff director, said today they felt no compelling reason during the fall of 1984 to pressure the General Assembly -- which was contemplating relatively minor changes in thrift industry regulations -- to enact tougher measures.
Hughes' discussion today of Liebmann's memorandum came at a crucial time for the governor, who while basking in this week's legislative victory that clinched the takeover of Merritt by Chase Manhattan Corp., is preparing to run for the U.S. Senate next year.
The Liebmann memo sheds new light on the politically nettlesome questions of how the Hughes administration has coped with the crisis and whether the governor should have anticipated it.
At a March news conference -- nearly six months after he saw Liebmann's memo and six weeks before the crisis began -- Hughes said Maryland's savings and loans were "not in trouble" and were "sound."
Today, answering a radio reporter's question after he and legislative leaders signed laws approving the Chase Manhattan transaction, Hughes said he first became aware of self-dealing in the thrift industry at a May 2 meeting with state and federal officials.
Later, in the interview with The Post, Hughes and Johnson stressed that they had been misled by Brown and other state government regulators, a point that Hughes took pains to make at a news conference two weeks ago.
Asked at that conference whether he was personally responsible for the thrift crisis, the governor replied: "No . . . . Even a governor is human . . . . I don't think anybody can point the full blame on any person, including the governor."
Despite the assertion by Hughes and Johnson that the administration was inadequately served by its regulators, Johnson himself lent credence to Liebmann's memo in an Oct. 30 directive to Brown's supervisor, in which Johnson asked for a review of Liebmann's allegations.
Liebmann, wrote Johnson, "from time to time . . . offers observations on matters of public interest, usually with great insight."
"George's discussion on savings and loan associations raises some particularly troubling problems that current practices permit, especially those that relate to what George calls self-dealing," Johnson continued. "It seems to me that George's observations on savings and loan problems call for more immediate solutions to regulatory problems . . . ."
In a telephone interview tonight, Liebmann -- a corporate lawyer from Baltimore who ran Hughes' transition team when the governor entered office in early 1979 -- said his 1984 memo was a natural extension of his role as a troubleshooter for the administration.
"The governor's style has always been to rely on his staff and his cabinet, and in this case it misfired," Liebmann said. "I'm not sure he was entirely well-served by his people."